Government spending, deficit in focus ahead of budget

As the government gets down to the business of drawing up the budget, there is a growing view among some influential sections that there should not be any spending cut on key programmes to meet the fiscal deficit target. The reasoning is that fiscal slippage, if any, is likely to be from the revenue side because of the disruption caused by the imposition of the goods and services tax (GST) and not reckless spending. The budget is likely to be presented early February.Cutting spending on investment to meet the deficit target, in such a situation, would stall economic recovery, an official privy to discussions told ET. Ahigher deficit would also allow the government to recalibrate the fiscal consolidation road map to create room to step up allocations in FY19 for the farm sector to address agrarian stress. “In a year of twin shocks (GST and demonetisation), should we not be more accommodating to allow the economy some support?” said a senior official, making a case against expenditure cuts in flagship programmes of the government as well as key social welfare schemes.The NK Singh committee has allowed the government fiscal leverage in a year of “far-reaching structural reforms in the economy with unanticipated fiscal implications.” GST would qualify as such a reform. ET had earlier reported that North Block was keen on sticking to the fiscal deficit target of 3.2% of GDP for the year.Finance minister Arun Jaitley has so far indicated that his ministry will meet the target. “The idea is that the glide path of the fiscal deficit should always be maintained so that our borrowings keep coming down,” he said in the Lok Sabha last week.The government has clarified that higher-than-trend fiscal deficit in the April-November period is because the early budget announcement— in the beginning of February rather than at its end — allowed a quick start to spending and that higher revenues toward the end of the year will correct the situation.The fiscal deficit touched 96.1% of the budget estimate at the end of October, much higher than 79.3% in the year earlier. The government budgeted spending of Rs 21.5 lakh crore in FY18. It had spent Rs 12.9 lakh crore by October with a fiscal deficit of Rs 5.25 lakh crore against a full-year fiscal deficit budget of Rs 5.47 lakh crore.Fiscal slippage concerns have persisted, giving rise to a debate over the course of action.Bond yields have already hardened in anticipation of a higher fiscal deficit. The benchmark 10-year bond yield rose to 7.21% in December 2017 from a low of 6.41% in July 2017 even after a 25 basis point reduction in the repo rate in this period. A basis point is 0.01 percentage point.”Fiscal slippage concerns linger on,” Reserve Bank of India Governor Urjit Patel said last week, warning it would have implications for inflation.While the Prime Minster’s economic advisory council has also favoured fiscal consolidation, not everyone is concerned about slippage, if any. The Federation of Indian Chambers of Commerce and Industry (Ficci) has called for a relaxation in the fiscal deficit, suggesting a 3.5% target for FY18. Niti Aayog vice-chairman Rajiv Kumar also favours a higher fiscal deficit if the room is used for capital investment.”Public spending or fiscal deficit has to be a countercyclical tool and if you agree to that, if you accept that borrowing for productivity enhancement is not the same thing as borrowing for booze, then why should you get hung up on it? Didn’t the Europeans do this after 2008? So why are we so self-flagellating?” he told ET in an interview last week.The finance ministry has said it will review the fiscal situation in December.A higher fiscal deficit this year would give the government room to reset the fiscal consolidation roadmap. This would become the starting point for the new glide path towards more sustainable debt levels suggested by the NK Singh committee. This will give the government room to step up spending for the rural and farm sector to address the agrarian stress in its last full budget before the next general election in 2019, seen as crucial following the BJP’s showing in the Gujarat election in these areas.Almost nine months into FY18 there is worry that government revenue could fall short of target and the finance ministry would need to rein in spending to stay within the target.The key concern is on account of a shortfall in indirect taxes because of lower GST collections in the initial months as businesses get used to the new regime and a shortfall in non-tax revenues as about Rs 50,000 crore budgeted from telecom spectrum may not materialise.In addition, the government has budgeted additional cash spending of Rs 44,500 through two supplementary demand for grants in the current fiscal. Not cutting spending to meet the fiscal deficit target will allow government spending to provide support to the economy while it recovers from GST and demonetisation. GDP growth recovered to 6.3% in the July-September quarter from a three-year low of 5.7% in the preceding quarter.Lower GDP growth would magnify the cuts needed to stay within the budget if revenues fall short of target. In the first half of the fiscal, nominal GDP growth, which is used to calculate the fiscal deficit, was 9.3% against 11.75% growth assumed in the budget. “In case the target of 3.2% of GDP is maintained, expenditure will need to be compressed further in 2H (second half) FY18… raising downside risks to growth,” DBS said in a report earlier this month.The government has built up fiscal credibility since it came to power and macroeconomic stabilisation has yielded rich dividends. Inflation and the current account deficit are within comfort zones and foreign investors have endorsed the policies. A fiscal slippage would be seen negatively by foreign investors.Moody’s recently raised India’s sovereign rating one notch after a gap of nearly 14 years. But one of the officials cited above said assessments by foreign agencies also take into account the country’s potential to grow besides the fiscal situation.